Berkshire Hathaway’s Warren Buffett touts financial performance of General Re, GEICO

General Re Corp. is willing to pass up on business if it cannot get an appropriate premium, while GEICO did well despite Hurricane Sandy, suggests Warren Buffett, chairman of Berkshire Hathaway Inc., the Omaha, Neb. investment firm that owns both insurers.

In his 2012 letter to shareholders, published last week, Buffett described Stamford, Conn.-based General Re as a “reinsurance powerhouse,” adding a “sound” insurance firm needs to adhere to four principles.

First, Buffett wrote, it must understand all exposures that might cause a policy to incur losses. Second, an insurer should “conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does.”

A carrier must also “set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered,” and lastly, it must “be “willing to walk away” if it cannot sell a policy at an appropriate premium.

“Many insurers pass the first three tests and flunk the fourth,” wrote Buffett. “They simply can’t turn their back on business that is being eagerly written by their competitors. That old line, ‘The other guy is doing it, so we must as well,’ spells trouble in any business, but none more so than insurance.”

Another Berkshire Hathaway firm is Government Employees Insurance Company, or GEICO, which made an underwriting profit in 2012 of US$680 million, despite the fact that Hurricane Sandy (which made landfall in New Jersey last October) caused more than three times the loss GEICO sustained in Hurricane Katrina, the storm that inundated New Orleans and its environs in 2005.

“We insured 46,906 vehicles that were destroyed or damaged in the storm, a staggering number reflecting GEICO’s leading market share in the New York metropolitan area,” Buffett wrote of Storm Sandy.

Since Berkshire Hathaway obtained control of Chevy Chase, Md.-based GEICO in 1995, Buffett noted, its share of the personal-auto market has grown from 2.5% to 9.7%.

“Premium volume meanwhile increased from $2.8 billion to $16.7 billion.”

Berkshire Hathaway, whose “big four” investments are minority interests in IBM, Coca Cola, American Express and Wells Fargo, also owns Berkshire Hathaway Reinsurance Group.

Buffet noted Berkshire Hathaway’s insurance operations delivered a combined total underwriting gain of US$1.6 billion in 2012.